And What Might Make Them

It has been close to 8 years now since we first found out that bankers routinely fixed the rates they charged to exchange funds, the “Libor.” The Times recently found that little has changed. (See, Tracking the Libor Scandal)

In April 2008 a New York Fed official was told by a Barclay’s employee: “We know that we’re not posting, um, an honest” rate, and, as a result, the head of the New York Fed suggested reforms to the head of the Bank of England. Some changes were made, but at the height of the financial crisis shortly afterwards, “the big British bank reported bogus figures.” Barclay’s settled for $450 million.

In December 2012, UBS settled criminal changes for $1.5 billion. In February 2013, the Royal Bank of Scotland paid a $612 million fine. The Dutch firm Rabobank settled charges of criminal wrongdoing for $1 billion in October 2013, followed by a $2.3 billion fine levied against Citigroup, JPMorgan Chase, Deutsche Bank, Royal Bank of Scotland and Société Générale. In October, Lloyds settled changes for $380 million. The following April, Deutsche Bank was fined $2.5 billion and required to fire seven managers. UBS settled for $203 million in May 1015, as the Justice Department annulled the non-prosecution agreement it had made because of the banks blatant repeat offenses.

More recently there has been another round of criminal accusations and multibillion-dollar penalties involving a scheme to manipulate the value of the world’s currencies. Four large global banks — Citigroup, JPMorgan Chase, Barclays and Royal Bank of Scotland — pleaded guilty to a series of federal crimes and paid enough penalties to wipe out nearly all the revenue that major investment banks generated from their foreign exchange businesses last year.

There is more, but this is enough to make the point that nothing much has changed over the years. But why?

There are essentially two reasons. One is that bankers feel themselves to be part of a club, an in-group. One employee at Barclays wrote in an email, “Always happy to help.” Another commented that they wanted to “fit in with the rest of the crowd.” Their loyalty was to each other, to other bankers not their customers and certainly not to the public. A Dutch banker reassured a colleague: “Don’t worry mate — there’s bigger crooks in the market than us guys!”

This sense of being a club is reinforced by the fact that employees frequently move back and forth among banks. Moreover, there is a “revolving door” between the banks and the agencies assigned to monitor them.

The second reason is that the “crimes” they committed seem abstract and victimless in a way that matches the anonymity of the perpetrators. The banks are penalized for the misdeeds of their officers. That means that the banks shareholders and customers get stuck with the bill, and club members go free.

Just now, however, there does seem to be the stirrings of change. The head of the Bank of England recently noted: “The banking scandals that followed the financial crisis are evidence that something fundamental is wrong.” And Christine Lagard, head of the IMF spoke of the necessity of leadership from the top, where chief executives and boards can reward ethical behavior that benefits the collective good, not just the deals of an individual rainmaker. According to The New York Times, “She lamented the fact that banks in the United States and Europe had paid $230 billion in fines with nary an individual at any firm being held responsible for what went wrong.”

“She spoke of the need for a Wall Street culture of ‘greater virtue and integrity’ and for banking to revive the idea of . . . it’s ‘purpose and broader responsibility to society.’ After all, she continued, “the goal of the financial sector must be not only to maximize the wealth of its shareholders, but to enrich society by supporting economic activity and creating value and jobs — to ultimately improve the well-being of people.”

These can be mere words, but they now come with the threat that if nothing changes the regulators will go after the individuals who are responsible for wrong-doing, and then they might actually break up the banks. The cozy clubs could be disbanded.

Perhaps more importantly, the top regulators now face the risk of being implicated themselves if nothing changes — and that risk might actually get them to work more aggressively at forcing the system to change.